Surviving the meltdown in the wholesale mortgage marketBlaise Dietzwholesale mortgage market, sub-prime demise, Creative Mortgage Lending, Southfield, Mich.
The meltdown that happened in the mortgage market in 1998 was a
category one tropical storm compared to the category five hurricane
that is sweeping through the mortgage market now. Quite frankly,
its ugly, and its going to get uglier, especially for the Detroit
market. The reason it held off so long was because the markets were
seeing double-digit rate appreciation and the equity growth in
property value allowed borrowers who were in trouble to refinance
again and again. Now, the appreciation rates are either flat or
declining, even in the most popular areas. In addition, the largest
amount of adjustable-rate mortgages ever written in the history of
mortgage lending is resetting or adjusting, and when you have
borrower payments increasing 20-40 percent, along with equity
declining (or being flat at best), borrowers fail to make their
payments and cannot refinance themselves out of trouble because
there is not enough equity left in their properties. The meltdown
in the mortgage market is chiefly caused by early payment default
and loans that are stuck in warehouse lines.
So how did we get to the state of affairs that we are in today?
Last year, the big guys in the wholesale mortgage market were
approving loans to 85 percent for borrowers who had 540 credit
scores, no trade lines, five jobs in the last 24 months and botched
verbal verifications of employment. The large companies were
approving loans and speculating that investor financial
institutions would buy them, even though they were outside the
institutions guidelines. Simply put, these companies were not sure
the loans would be purchased. It was clearly a loose way of doing
business, which the wholesale market had gotten away with for a
long time because of the massive liquidity in the industry. Today,
account executives who chose to work for those companies are
unemployed, and the company executives who chose to do business
that way may face imprisonment at worst and lose all they have
worked for at best. These companies are servicing billions of
dollars of loans that were underwritten improperly and, therefore,
could not be sold to institutions. When a lender sells bad loans,
he has to service them, and when those loans are defaulting at a
torrid pace, a company ends up in deep trouble. In addition, the
warehouse line holders, who need to protect their investors, start
to demand those same loans get off the warehouse line. Thats when
everything implodes. The larger sub-prime originators will most
likely go bankrupt, all because of greed.
This is also the era of loss mitigation. Because of the massive
number of buybacks on the books, lenders have to accept 70-80 cents
on the dollar for their loans. The broken loan market is as busy as
it has ever been in the mortgage business.
So, is everything gloom and doom in the wholesale market? No.
Many tremendous opportunities still exist for cautious,
conservative third-party originators who were prescient enough to
only write loans to the specific guidelines of the institutional
investors and to only buy loans that they could sell. These
companies are healthy and growing. The guidelines are based on risk
modelinga projection of what a borrower can actually handle
payment-wise. The guidelines are aggressive enough. When a lender
ventures outside the guidelines, that lender is approving borrowers
for loans that the risk models say will not work.
Investors are reminding these few conservative wholesale lenders
to stay the course. The appetite for quality mortgage paper as an
investment is still there and will never go away. The people that
are willing to buckle down now will be richly rewarded in the near
future. Credit quality borrowersthose with a credit score of 620 or
greaterwill also benefit from the larger supply of homes on the
market. Because of defaults and repurchase demands, inventories
will increase. There are a lot of healthy companies in the country
that employ people who have housing needs, and the borrowers who
have good credit are going to be able to purchase homes at 70-80
cents on the dollar because of the massive speculation that has
been going on since 2003. A lot of the loans that are on default
are from borrowers who had bad credit, put zero down and were not
able to flip their non-owner-occupied properties. There is more
than $1 trillion worth of loans that are resetting in 2007, and all
need refinancing. There are tremendous opportunities for cautious,
makes-sense lenders in Detroit and throughout the United
States.
Blaise Dietz is the co-CEO and president of Southfield,
Mich.-based Creative Mortgage Lending. He may be reached at
[email protected].
